NCPA - National Center for Policy Analysis

THE CORPORATE INCOME TAX AND WORKERS' WAGES

August 19, 2009

While state-local corporate tax revenue has remained relatively constant for several decades, bringing in roughly five percent of revenue, some states have significantly increased their reliance on corporate taxes while others have relied less on that revenue source.  The average state corporate tax rate has risen from 2.6 percent several decades ago to 4.4 percent today, says the Robert Carroll, a senior fellow at the Tax Foundation.

In a recent study, he examines this correlation between corporate tax rates and wages, and finds a causal relationship.  States with comparatively low corporate taxes have seen wages rise beyond what they would have otherwise.  Specifically, a one percent drop in the average tax rate leads to a 0.014 percent rise in real wages five years later.

Among the key findings:

  • States with high corporate income taxes have depressed their workers' wages over the long term, while states with low corporate taxes have boosted worker productivity and real wages.
  • Between 1970 and 2007, a one-dollar increase in the average state-local corporate tax rate caused a $2.50 dip in wages five years later, compared with lower-taxed states.
  • The reverse is also true: a one percent hike in the average tax rate leads to a 0.014 percent drop in real wages, or roughly a $2.50 loss in wages for each one-dollar rise in corporate tax collections.

These results add to a growing literature in the international arena that compares changes in corporate tax rates and workers' wages, says Carroll.  Moreover, it draws into question the conventional wisdom that corporate taxes add to the progressivity of the tax system.

If instead of burdening capital, the corporate tax primarily burdens labor and the corporate income tax does not add to the progressivity of the tax system, says Carroll.

Source: Robert Carroll, "The Corporate Income Tax and Workers' Wages: New Evidence from the 50 States," Tax Foundation, Special Report, No. 169, August 3, 2009.

 

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